Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 000-28386
CTI BIOPHARMA CORP.
(Exact name of registrant as specified in its charter)
Delaware
 
91-1533912
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3101 Western Avenue, Suite 800
 
 
Seattle, Washington
 
98121
(Address of principal executive offices)
 
(Zip Code)
(206) 282-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
CTIC
The Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨  
  
Smaller reporting company
 
ý
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding at October 24, 2019
Common Stock, par value $0.001 per share
 
57,978,725




CTI BIOPHARMA CORP.
TABLE OF CONTENTS
 
 
  
PAGE
PART I - FINANCIAL INFORMATION
  
 
 
 
 
ITEM 1: Financial Statements (unaudited)
  
 
 
 
Condensed Consolidated Balance Sheets
  
 
 
 
Condensed Consolidated Statements of Operations
  
 
 
 
Condensed Consolidated Statements of Comprehensive Loss
  
 
 
 
Condensed Consolidated Statements of Changes in Stockholders' Equity
 
 
 
 
Condensed Consolidated Statements of Cash Flows
  
 
 
 
Notes to Condensed Consolidated Financial Statements
  
 
 
 
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
 
 
 
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
ITEM 4: Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
ITEM 1: Legal Proceedings
 
 
 
 
ITEM 1A: Risk Factors
 
 
 
 
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
ITEM 3: Defaults Upon Senior Securities
 
 
 
 
ITEM 4: Mine Safety Disclosures
 
 
 
 
ITEM 5: Other Information
 
 
 
 
ITEM 6: Exhibits
 
 
 
 
Signatures
 


3



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,917

 
$
36,439

Short-term investments
11,815

 
30,599

Receivables from license and development services arrangements
137

 
13,679

Prepaid expenses and other current assets
2,798

 
1,775

Total current assets
49,667

 
82,492

Property and equipment, net
1,381

 
1,793

Other assets
7,534

 
5,547

Total assets
$
58,582

 
$
89,832

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,965

 
$
4,498

Accrued expenses
11,036

 
12,852

Current portion of long-term debt
10,470

 
4,812

Other current liabilities
3,448

 
893

Total current liabilities
27,919

 
23,055

Long-term debt, less current portion

 
9,267

Other liabilities
4,472

 
4,571

Total liabilities
32,391

 
36,893

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Preferred stock, $0.001 par value per share:
 
 
 
Authorized shares - 33,333 as of September 30, 2019 and December 31, 2018
 
 
 
Series O Preferred Stock, 12,575 shares issued and outstanding as of September 30, 2019 and December 31, 2018 (Aggregate liquidation preference of $25,150 as of September 30, 2019 and December 31, 2018)

 

Common stock, $0.001 par value per share:
 

 
 

Authorized shares - 131,500,000 and 101,500,000 as of September 30, 2019 and December 31, 2018, respectively
 

 
 

Issued and outstanding shares - 57,978,725 and 57,986,075 as of September 30, 2019 and December 31, 2018, respectively
58

 
58

Additional paid-in capital
2,297,931

 
2,294,025

Accumulated other comprehensive loss
(10,663
)
 
(10,643
)
Accumulated deficit
(2,255,375
)
 
(2,224,746
)
Total CTI stockholders' equity
31,951

 
58,694

Noncontrolling interest
(5,760
)
 
(5,755
)
Total stockholders' equity
26,191

 
52,939

Total liabilities and stockholders' equity
$
58,582

 
$
89,832

 See accompanying notes.

4



CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018

 

 




License and contract revenues
$
2,289


$
723


$
3,345


$
12,182

Operating costs and expenses:
 


 







Research and development
7,598


9,730


19,126


28,539

Selling, general and administrative
4,403


5,763


14,662


16,750

Restructuring expenses




794



Total operating costs and expenses
12,001


15,493


34,582


45,289

Loss from operations
(9,712
)

(14,770
)

(31,237
)

(33,107
)
Non-operating income (expense):
 


 







Interest income
276

 
436

 
1,003

 
800

Interest expense
(240
)

(308
)

(803
)

(893
)
Amortization of debt discount and issuance costs
(131
)

(130
)

(391
)

(394
)
Foreign exchange loss
(240
)

(46
)

(409
)

(898
)
Other non-operating income






4,295

Total non-operating (expense) income, net
(335
)

(48
)

(600
)

2,910

Net loss before noncontrolling interest
(10,047
)

(14,818
)

(31,837
)

(30,197
)
Noncontrolling interest


9


5


31

Net loss
(10,047
)

(14,809
)

(31,832
)

(30,166
)
     Deemed dividends on preferred stock






(80
)
Net loss attributable to common stockholders
$
(10,047
)

$
(14,809
)

$
(31,832
)

$
(30,246
)
Basic and diluted net loss per common share
$
(0.17
)

$
(0.26
)

$
(0.55
)

$
(0.55
)
Shares used in calculation of basic and diluted net loss per common share
57,974


57,964


57,973


55,434

 
See accompanying notes.


5



CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss before noncontrolling interest
$
(10,047
)
 
$
(14,818
)
 
$
(31,837
)
 
$
(30,197
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,332

 
216

 
1,570

 
(3,276
)
Unrealized foreign exchange loss on intercompany balance
(1,359
)
 
(223
)
 
(1,610
)
 
(345
)
Net unrealized (loss) gain on available-for-sale securities
(14
)
 
(5
)
 
20

 
(17
)
Other comprehensive loss
(41
)
 
(12
)
 
(20
)
 
(3,638
)
Comprehensive loss
(10,088
)
 
(14,830
)
 
(31,857
)
 
(33,835
)
Comprehensive loss attributable to noncontrolling interest

 
9

 
5

 
31

Comprehensive loss attributable to CTI
$
(10,088
)
 
$
(14,821
)
 
$
(31,852
)
 
$
(33,804
)
 
See accompanying notes.


6



CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)

 
 
 
 
 
 
 
 
 
Additional
 
Accumulated Other
 
 
 
 
 
Total
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Comprehensive
 
Accumulated
 
Noncontrolling
 
Stockholders'
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Loss
 
Deficit
 
Interest
 
Equity
Balance at December 31, 2018
13

 
$

 
57,986

 
$
58

 
$
2,294,025

 
$
(10,643
)
 
$
(2,224,746
)
 
$
(5,755
)
 
$
52,939

Cumulative effect adjustments

 

 

 

 
(7
)
 

 
1,203

 

 
1,196

Balance at January 1, 2019
13

 
$

 
57,986

 
$
58

 
$
2,294,018

 
$
(10,643
)
 
$
(2,223,543
)
 
$
(5,755
)
 
$
54,135

Equity-based compensation

 

 
(7
)
 

 
1,257

 

 

 

 
1,257

Net loss

 

 

 

 

 

 
(10,814
)
 

 
(10,814
)
Other comprehensive income

 

 

 

 

 
9

 

 

 
9

Balance at March 31, 2019
13

 
$

 
57,979

 
$
58

 
$
2,295,275

 
$
(10,634
)
 
$
(2,234,357
)
 
$
(5,755
)
 
$
44,587

Equity-based compensation

 

 

 

 
1,361

 

 

 

 
1,361

Other

 

 

 

 
1

 

 

 

 
1

Noncontrolling interest

 

 

 

 

 

 

 
(5
)
 
(5
)
Net loss

 

 

 

 

 

 
(10,971
)
 

 
(10,971
)
Other comprehensive income

 

 

 

 

 
12

 

 

 
12

Balance at June 30, 2019
13

 
$

 
57,979

 
$
58

 
$
2,296,637

 
$
(10,622
)
 
$
(2,245,328
)
 
$
(5,760
)
 
$
34,985

Equity-based compensation

 

 

 

 
1,294

 

 

 

 
1,294

Net loss

 

 

 

 

 

 
(10,047
)
 

 
(10,047
)
Other comprehensive loss

 

 

 

 

 
(41
)
 

 

 
(41
)
Balance at September 30, 2019
13

 
$

 
57,979

 
$
58

 
$
2,297,931

 
$
(10,663
)
 
$
(2,255,375
)
 
$
(5,760
)
 
$
26,191



7



 
 
 
 
 
 
 
 
 
Additional
 
Accumulated Other
 
 
 
 
 
Total
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Comprehensive
 
Accumulated
 
Noncontrolling
 
Stockholders'
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Loss
 
Deficit
 
Interest
 
Equity
Balance at January 1, 2018
1

 
$

 
42,969

 
$
43

 
$
2,223,388

 
$
(6,272
)
 
$
(2,195,346
)
 
$
(5,723
)
 
$
16,090

Issuance of common stock, net of issuance costs

 

 
23,012

 
23

 
64,166

 

 

 

 
64,189

Exchange of common stock for preferred stock
12

 

 
(8,000
)
 
(8
)
 
8

 

 

 

 

Value of beneficial conversion features related to preferred stock

 

 

 

 
80

 

 
(80
)
 

 

Equity-based compensation

 

 

 

 
1,336

 

 

 

 
1,336

Other

 

 

 

 
(1
)
 

 

 

 
(1
)
Noncontrolling interest

 

 

 

 

 

 

 
(14
)
 
(14
)
Net loss

 

 

 

 

 

 
(4,021
)
 

 
(4,021
)
Other comprehensive loss

 

 

 

 

 
(532
)
 

 

 
(532
)
Balance at March 31, 2018
13

 
$

 
57,981

 
$
58

 
$
2,288,977

 
$
(6,804
)
 
$
(2,199,447
)
 
$
(5,737
)
 
$
77,047

Issuance costs related to common stock issuance

 

 

 

 
(19
)
 

 

 

 
(19
)
Equity-based compensation

 

 

 

 
1,040

 

 

 

 
1,040

Other

 

 
4

 

 
19

 

 

 

 
19

Noncontrolling interest

 

 

 

 

 

 

 
(9
)
 
(9
)
Net loss

 

 

 

 

 

 
(11,336
)
 

 
(11,336
)
Other comprehensive loss

 

 

 

 

 
(3,094
)
 

 

 
(3,094
)
Balance at June 30, 2018
13

 
$

 
57,985

 
$
58

 
$
2,290,017

 
$
(9,898
)
 
$
(2,210,783
)
 
$
(5,746
)
 
$
63,648

Equity-based compensation

 

 

 

 
2,528

 

 

 

 
2,528

Other

 

 
4

 

 
15

 

 

 

 
15

Noncontrolling interest

 

 

 

 

 

 

 
(8
)
 
(8
)
Net loss

 

 

 

 

 

 
(14,809
)
 

 
(14,809
)
Other comprehensive loss

 

 

 

 

 
(12
)
 

 

 
(12
)
Balance at September 30, 2018
13

 
$

 
57,989

 
$
58

 
$
2,292,560

 
$
(9,910
)
 
$
(2,225,592
)
 
$
(5,754
)
 
$
51,362


See accompanying notes.


8



CTI BIOPHARMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
Nine Months Ended September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss before noncontrolling interest
$
(31,837
)
 
$
(30,197
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Share-based compensation expense
3,911

 
4,904

Depreciation and amortization
412

 
448

Write-off of deferred financing costs
213

 

Reserve for excess, obsolete or unsalable inventory

 
535

Gain on dissolution of a foreign entity

 
(4,288
)
Noncash interest expense
391

 
394

Noncash rent benefit
(484
)
 
(1,201
)
Other
57

 
282

Changes in operating assets and liabilities:
 

 
 

Receivables from license and development services arrangements
13,534

 
996

Prepaid expenses and other current assets
252

 
686

Other assets
1,683

 
(134
)
Accounts payable
(1,532
)
 
(493
)
Accrued expenses
(1,809
)
 
1,858

Deferred revenue

 
(965
)
Other liabilities
(1,127
)
 

Net cash used in operating activities
(16,336
)
 
(27,175
)
Investing activities
 

 
 

Purchases of property and equipment

 
(33
)
Purchases of short-term investments
(8,507
)
 
(29,412
)
Proceeds from maturities of short-term investments
27,400

 
1,500

Net cash provided by (used in) investing activities
18,893

 
(27,945
)
Financing activities
 
 
 
Proceeds from common stock offering, net of issuance costs

 
64,170

Repayment of debt
(4,000
)
 

Payment of tax withholding obligations related to stock compensation

 
(20
)
Proceeds from stock option exercises

 
47

Proceeds from sales of common stock under employee stock purchase plan
1

 
6

Cash paid for issuance costs
(45
)
 
(100
)
Net cash (used in) provided by financing activities
(4,044
)
 
64,103

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(35
)
 
710

Net (decrease) increase in cash and cash equivalents
(1,522
)
 
9,693

Cash and cash equivalents at beginning of period
36,439

 
43,218

Cash and cash equivalents at end of period
$
34,917

 
$
52,911

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
834

 
$
886

 
 
 
 
Supplemental disclosure of noncash activities
 
 
 
Right-of-use assets obtained in exchange for operating lease liabilities
$
4,208

 
$

Exchange of common stock and preferred stock for preferred stock
$

 
$
24,080

 
See accompanying notes.

9



CTI BIOPHARMA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Description of Business and Summary of Significant Accounting Policies
 
CTI BioPharma Corp., together with its wholly-owned subsidiary, also referred to collectively in this Quarterly Report on Form 10-Q as “we,” “us,” “our,” the “Company” and “CTI,” is a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies for blood-related cancers that offer a unique benefit to patients and their healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We concentrate our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are focused on evaluating pacritinib, our sole product candidate currently in active development, for the treatment of adult patients with myelofibrosis.

We operate in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products requires approval from, and is subject to, ongoing oversight by the Food and Drug Administration, or the FDA, in the U.S., the European Medicines Agency, or the EMA, in the European Union, or the E.U., and comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain, may take many years and may involve expenditure of substantial resources.

Basis of Presentation

The accompanying unaudited financial information as of and for the three and nine months ended September 30, 2019 and 2018 has been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 13, 2019.

The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of CTI and its wholly-owned subsidiary, CTI Life Sciences Limited, or CTILS. As of September 30, 2019, we also had an approximately 60% interest in our majority-owned subsidiary, Aequus Biopharma, Inc., or Aequus. The remaining interest in Aequus not held by CTI is reported as noncontrolling interest in the condensed consolidated financial statements.

All intercompany transactions and balances are eliminated in consolidation.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the condensed consolidated financial statements are issued. Our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

We will need to continue to conduct research, development, testing and regulatory compliance activities with respect to pacritinib and ensure the procurement of manufacturing and drug supply services, the costs of which, together with projected general and administrative expenses, is expected to result in operating losses for the foreseeable future. In October 2016, we resumed primary responsibility for the development and commercialization of pacritinib as a result of the termination of a Development,

10



Commercialization and License Agreement, or the Pacritinib License Agreement, with Baxalta and are no longer eligible to receive cost sharing or milestone payments for pacritinib's development. We have incurred net operating losses every year since our formation. As of September 30, 2019, we had an accumulated deficit of $2.3 billion, and we expect to continue to incur net losses for the foreseeable future. Our available cash, cash equivalents and short-term investments were $46.7 million as of September 30, 2019, and we expect that our present financial resources will only be sufficient to meet our obligations as they come due and to fund our operations into the third quarter of 2020. Based on our evaluation completed pursuant to Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, these factors raise substantial doubt about our ability to continue as a going concern.

Accordingly, we will need to acquire additional funds in order to develop our business and continue the development of pacritinib. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding obtained through the sale of such shares or otherwise may not be sufficient, available on favorable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs, reduce our selling, general and administrative expenses, be unable to attract and retain highly-qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations and at affordable rates with competitive terms, refrain from making our contractually required payments when due (including debt payments) and/or may be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. The amount of financing we require is dependent on many factors, such as the number of clinical trial sites, the number of patients in the trial, the pace of patient enrollment and other matters that may impact clinical development, including changes to the trial that we may initiate or that may be requested by the FDA or other regulators, and there can be no assurance as to the amount of funding necessary to fund the development of pacritinib to completion. In addition, our ability to comply with covenants under the loan and security agreement with Silicon Valley Bank, or SVB, may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants, including a material adverse change in our business, operations or condition (financial or otherwise) could result in an event of default under the loan and security agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable. See Long-term Debt below for further discussion. The accompanying condensed consolidated financial statements do not include adjustments, if any, that may result from the outcome of this uncertainty.

Cash, Cash Equivalents and Short-term Investments

As of September 30, 2019 and December 31, 2018, our cash, cash equivalents and short-term investments consisted of cash, money market funds, U.S. government and agency securities and corporate debt securities. Cash equivalents and short-term investments are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1—Valuations based on unadjusted quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs that are supported by little or no market activity, reflecting our own assumptions. These valuations require significant judgment or estimation.

We measure the fair value of money market funds based on the closing price reported by a fund sponsor from an actively traded exchange. We value all other securities using broker quotes that utilize observable market inputs. We did not hold cash, cash equivalents and short-term investments categorized as Level 3 assets as of September 30, 2019 and December 31, 2018. The following table summarizes, by major security type, our cash, cash equivalents and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):


11



 
September 30, 2019
 
December 31, 2018
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Total Estimated Fair Value
 
Total Estimated
Fair Value
Cash
$
801

 
$

 
$

 
$
801

 
$
919

Level 1 securities:
 
 
 
 
 
 
 
 
 
Money market funds
31,624

 

 

 
31,624

 
20,525

Level 2 securities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
8,786

 
2

 

 
8,788

 
15,213

Corporate debt securities
5,516

 
3

 

 
5,519

 
30,381

Total cash, cash equivalents and short-term investments
$
46,727

 
$
5

 
$

 
$
46,732

 
$
67,038


Receivables from License and Development Services Arrangements

Our receivables relate to amounts payable or reimbursable to us under the terms of license and development services arrangements with our partners. The receivable balance as of September 30, 2019 primarily related to royalties from our partners Les Laboratoires Servier and Institut de Recherches Internationales Servier, or Servier. The receivable balance as of December 31, 2018 primarily related to a milestone receivable from Servier for the attainment of a regulatory milestone in November 2018 as well as a milestone receivable from Teva for the attainment of a worldwide net sales milestone of TRISENOX in December 2018. Receivables are reviewed for collectability whenever circumstances indicate that the carrying amount of the receivable may not be recoverable. We had no allowance for doubtful accounts from license and development services arrangements as of September 30, 2019 or December 31, 2018.

Italian Value Added Tax Receivable

We historically carried out research and development activities in Italy and incurred value added tax, or VAT, from Italian suppliers on the acquisition of goods and services in Italy. This VAT should be considered as an input VAT credit. We treated the majority of our sales made in Italy without output VAT (on the basis that the supplies should be considered outside the scope of Italian VAT). This resulted in the value of input VAT exceeding the value of output VAT, and accordingly we submitted a refund claim for the VAT. The Italian Tax Authority, or the ITA, has challenged the treatment of the sales transactions and claimed that the sales transactions made by us should have been subject to output VAT. Our Italian VAT receivable was approximately $4.3 million and $4.5 million as of September 30, 2019 and December 31, 2018, respectively. Substantially all of our VAT receivable is included in Other assets. As disclosed in Note 9. Contingencies, the ITA assessed us for additional VAT payments for services we provided in Italy, which we do not believe we owe. We have not recorded an amount in the financial statements for this contingent liability as we do not believe the potential payment of up to €4.2 million (or approximately $4.6 million converted using the currency exchange rate as of September 30, 2019) to the ITA is probable at this time.

Leases

As discussed in Recently Adopted Accounting Standards below, we adopted Accounting Standards Codification, or ASC, Topic 842 - Leases, on January 1, 2019. Under ASC 842, we determine if an arrangement is a lease at inception. We recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as operating or finance at lease commencement, which will affect the pattern and classification of expense recognition in our condensed consolidated statements of operations.

Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide a readily determinable implicit rate of return, we use our incremental borrowing rate to derive the present value of lease payments, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
An operating lease right-of-use asset is measured at the amount of the lease liability, adjusted for prepaid or accrued lease payments, lease incentives received, unamortized initial direct costs and the impairment of the right-of-use asset. A lease may include options to extend or terminate the lease. When it is reasonably certain that we will exercise such an option, it is considered in the lease term. Right-of-use assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.


12



Lease expense for operating leases is recognized on a straight-line basis over the lease term as part of Research and development expenses and Selling, general and administrative expenses in our condensed consolidated statements of operations. The current portion of right-of-use assets and the non-current portion of right-of-use assets are included in Prepaid expenses and other current assets and Other assets, respectively, and the current portion of lease liabilities and the non-current portion of lease liabilities are included in Other current liabilities and Other liabilities, respectively, in our condensed consolidated balance sheets.

Long-term Debt
All amounts due under the loan and security agreement with SVB have been classified as a current liability as of September 30, 2019 due to the considerations discussed in Liquidity above and the assessment that the material adverse change clause under the loan and security agreement is not within our control. We have not been notified of an event of default by SVB as of the date of the filing of this Quarterly Report on Form 10-Q.
Revenue Recognition

We adopted ASC 606 - Revenue from Contracts with Customers, on January 1, 2018, using a modified retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other authoritative literature. Under ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. We apply the five-step model to arrangements that meet the definition of a contract under ASC 606 including when it is probable that we will collect the consideration we are entitled to in exchange for goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations, and assesses whether each promised good or service is distinct. We recognize revenue for the amount of the transaction price that is allocated to the respective performance obligation as the performance obligation is satisfied. 

License and Development Services Arrangements

We recognize license and contract revenue under license and development services arrangements that are within the scope of ASC 606. The terms of these agreements may contain multiple performance obligations, which may include licenses and research and development activities. We evaluate these agreements under ASC 606 to determine distinct performance obligations. Prior to recognizing revenue, we make estimates of the transaction price, including any variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that there will not be a significant reversal in the amount of cumulative revenue recognized and when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the arrangement. If there are multiple, distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on its relative standalone selling price. Revenue is recognized by measuring the progress toward complete satisfaction of the performance obligations using an input measure in accordance with ASC-340-40, Other Assets and Deferred Costs: Contracts with Customers.

Foreign Currency Translation and Transaction Gains and Losses

We record foreign currency translation adjustments and transaction gains and losses in accordance with ASC 830 - Foreign Currency Matters. For our operations that have a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net loss, but are accumulated in the cumulative foreign currency translation adjustment account as a separate component of stockholders’ equity, except for intercompany transactions that are of a short-term nature with entities that are consolidated, combined or accounted for by the equity method in our condensed consolidated financial statements. We and our subsidiary also have transactions in foreign currencies other than the functional currency. We record transaction gains and losses in our condensed consolidated statements of operations related to the recurring measurement and settlement of such transactions.

The intercompany balance due from CTILS is considered to be of a long-term nature. An unrealized foreign exchange loss of $1.4 million and $1.6 million for the three and nine months ended September 30, 2019, respectively, and an unrealized foreign exchange loss of $0.2 million and $0.3 million for the same periods in 2018 were recorded in the cumulative foreign currency

13



translation adjustment account. As of September 30, 2019 and December 31, 2018, the intercompany balance due from CTILS was €29.8 million (or $32.5 million upon conversion from euros as of September 30, 2019) and €28.7 million (or $32.8 million upon conversion from euros as of December 31, 2018), respectively. As discussed in Note 8. Other Comprehensive Loss, we anticipate the dissolution of CTILS in the fourth quarter of 2019, and the intercompany balance due from CTILS is expected to be treated as capital contribution in connection with the dissolution. See Note 8. Other Comprehensive Loss for further discussion.

Net Loss per Share

Basic net loss per share is calculated based on the net loss attributable to common stockholders divided by the weighted average number of our common shares outstanding for the period. Diluted net income per share assumes the conversion of all dilutive convertible securities using the if-converted method and assumes the exercise or vesting of other dilutive securities, such as warrants and stock awards, using the treasury stock method. In periods when we have a net loss, stock awards, warrants and convertible securities are excluded from our calculation of net loss per share as their inclusion would have an anti-dilutive effect.

Common shares underlying stock awards, warrants and convertible preferred stock aggregating 19.8 million shares and 18.5 million shares for the three and nine months ended September 30, 2019, respectively, and 16.7 million shares and 14.8 million shares for the same periods in 2018, respectively, were excluded from the calculation of diluted net loss per share because they were anti-dilutive.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASC 842 - Leases, which requires lessees to recognize virtually all of their leases (other than leases that meet the definition of a short-term lease) on the balance sheet. On January 1, 2019, we adopted ASC 842 using the modified retrospective approach with a cumulative-effect adjustment as of January 1, 2019 in accordance with ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements. Prior period amounts are not adjusted and continue to be reported under previous lease guidance, ASC 840 - Leases.

We have performed an evaluation of our contracts with customers and suppliers in accordance with ASC 842 and have determined that the agreements for our office space, parking and office equipment contained a lease. All identified leases are classified as operating leases. We had no finance or capital leases as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018. We also elected a package of practical expedients permitted under the transition guidance within the new standard.

The impact of the adoption of ASC 842 on our condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):
 
December 31, 2018
 
Adjustments due to adoption of ASC 842
 
January 1, 2019
Right-of-use assets, current
$

 
$
1,034

 
$
1,034

Right-of-use assets, non-current
$

 
$
3,174

 
$
3,174

 
 
 
 
 
 
Lease liabilities, current
$

 
$
1,687

 
$
1,687

Lease liabilities, non-current
$

 
$
4,946

 
$
4,946

Deferred rent, current
$
893

 
$
(893
)
 
$

Deferred rent, non-current
$
2,157

 
$
(2,157
)
 
$

 
 
 
 
 
 
Accumulated deficit
$
(2,224,746
)
 
$
1,196

 
$
(2,223,550
)

The adoption of the standard did not materially impact our condensed consolidated statements of operations or condensed consolidated statements of cash flows. See Note 4. Leases for further details about our leases.

In June 2018, the FASB issued new accounting guidance which simplifies the accounting for share-based payments granted to nonemployees for goods and services by aligning it with the accounting for share-based payments to employees, with certain exceptions. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this guidance on January 1, 2019. The adoption of this accounting guidance did not have a material impact on our condensed consolidated financial statements.

14




Recently Issued Accounting Standards

In June 2016, the FASB issued new accounting guidance which amends the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued new accounting guidance which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for either the entire standard or any eliminated or modified disclosures. We do not expect the adoption of this accounting guidance to have a material impact on our condensed consolidated financial statements.

Although there were several other new accounting pronouncements issued or proposed by the FASB, we do not believe any of these have had or will have material impact on our condensed consolidated financial statements.
 
Reclassifications

Certain prior year items have been reclassified to conform to current year presentation.

2. Other Assets

Other assets consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Right-of-use assets, non-current
$
2,259

 
$

Italian VAT receivables
4,265

 
4,480

Italian VAT deposit
469

 
493

Rent deposit
194

 
194

Other
347

 
380

Other assets
$
7,534

 
$
5,547


On January 1, 2019, we adopted ASC 842 - Leases and recorded right-of-use assets for our operating leases. See Note 1. Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Standards and Note 4. Leases for further details.

For details regarding our Italian VAT receivables and Italian VAT deposit, see Note 1. Description of Business and Summary of Significant Accounting Policies - Italian Value Added Tax Receivable and Note 9. Contingencies.

3. Other Liabilities

Other liabilities consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Lease liabilities, non-current
$
3,498

 
$

Deferred rent, non-current

 
2,157

Other long-term obligations
974

 
2,414

Total other liabilities
$
4,472

 
$
4,571


On January 1, 2019, we adopted ASC 842 - Leases and recorded lease liabilities and corresponding right-of-use assets for our operating leases. Deferred rent, less current portion as of December 31, 2018 included amounts related to lease

15



incentives associated with our operating lease for office space. Under ASC 842, such lease incentives are accounted for as a reduction to the right-of-use asset balance. See Note 1. Description of Business and Summary of Significant Accounting Policies - Recently Adopted Accounting Standards and Note 4. Leases for further details.

Other long-term obligations as of December 31, 2018 included a fee in the amount of $1.4 million payable to Silicon Valley Bank. See Part II, Item 8, "Notes to Consolidated Financial Statements, Note 7. Long-term debt" of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information. As of September 30, 2019, this balance has been reclassified to Other current liabilities. See Note 1. Description of Business and Summary of Significant Accounting Policies- Long-term Debt for further details regarding reclassification.

4. Leases

In January 2012, we entered into an agreement with Selig Holdings Company LLC, or Selig, to lease approximately 66,000 square feet of office space in Seattle, Washington for a term of 10 years, commencing May 2012. We have two five-year options to extend the term of the lease at a market rate determined according to the lease. We also had an option to early terminate the lease after the fifth anniversary from the commencement date. We were provided with a total of $3.9 million for certain tenant improvements and other lease incentives. The options to extend or terminate the lease were not considered in the determination of the right-of-use asset and the lease liability as we did not consider it reasonably certain that we would exercise such options. We also lease parking space and certain office equipment. We have elected not to separate a non-lease component from a lease component for these leases.
In December 2017, we entered into an agreement to sublease approximately 44,000 square feet of our office space. No payments were due through May 2018, after which monthly rent is due through the sublease termination date in April 2022.

The operating lease for our office space includes common area maintenance services provided by Selig, which are considered a non-lease component. Since the payments for these services are based on the actual costs incurred by Selig in providing the services, we consider these payments as variable lease expenses.

The components of lease expense, which were included in our condensed consolidated statements of operations, were as follows (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Operating lease expense
$
421

 
$
342

 
$
1,274

 
$
1,043

Variable lease expense
45

 
50

 
132

 
145

Sublease income
(311
)
 
(311
)
 
(935
)
 
(935
)
Total lease expense, net
$
155

 
$
81

 
$
471

 
$
253


The balance sheet classification of operating lease right-of-use assets and operating lease liabilities were as follows (in thousands):
 
September 30, 2019
Right-of-use assets, current (included in Prepaid expenses and other current assets)
$
1,193

Right-of-use assets, non-current (included in Other assets)
2,259

Total right-of-use assets
$
3,452

 
 
Lease liabilities, current (included in Other current liabilities)
$
1,894

Lease liabilities, non-current (included in Other liabilities)
3,498

Total lease liabilities
$
5,392


As September 30, 2019, the maturities of operating lease liabilities were as follows (in thousands):

16



 
Operating Leases
2019
$
604

2020
2,443

2021
2,437

2022
820

Total lease payments
6,304

Less imputed interest
(912
)
Total lease liabilities
$
5,392


The schedule above does not contemplate any sublease income from subleasing of our office space. As of September 30, 2019, the total remaining scheduled sublease payments were $3.7 million.

Supplemental information relating to our operating leases is as follows (in thousands):
 
September 30, 2019
Supplemental cash flow information
 
Cash paid for amounts included in the measurement of lease liabilities
$
1,788

Right-of-use assets obtained in exchange for operating lease liabilities
$
4,208

 
 
Weighted-average remaining lease term of operating leases (years)
2.56

Weighted-average discount rate of operating leases
12.4
%

5. Termination of Servier Agreement

In February 2019, we entered into a Termination and Transfer Agreement, or the Termination Agreement, among, on the one hand, the Company and its subsidiary, CTILS, and, on the other hand, Servier. The Termination Agreement terminates the Amended and Restated Exclusive License and Collaboration Agreement, dated as of April 21, 2017 by and among the Company, CTILS and Servier, or the Restated Agreement.

Under the Termination Agreement, we were responsible for non-U.S. pharmacovigilance for PIXUVRI (pixantrone), the submission of a marketing authorization application for PIXUVRI and wind down of the PIX306 clinical trial during a transition period.

Servier agreed to reimburse us €620,000 (of which, €65,000 was reimbursed and recognized as license and contract revenue in 2018) for costs to be incurred in connection with transition period activities on or before May 31, 2019 and to provide additional reimbursement to us for transition period activities occurring after May 31, 2019, not to exceed €50,000 per month or €200,000 in the aggregate. For the nine months ended September 30, 2019, we recognized $0.6 million of license and contract revenue related to the transition period activities, which does not include the aforementioned additional reimbursement. There was no such license and contract revenue during the three months ended September 30, 2019.

In April 2019, Servier announced that the EMA's Committee for Medicinal Products for Human Use, or CHMP, issued a positive opinion for PIXUVRI to convert its conditional approval into a standard marketing authorization as a single agent for the treatment of adult patients with multiply relapsed or refractory aggressive non-Hodgkin B-cell lymphoma, and in June 2019, the European Commission adopted the decision to grant non-conditional marketing authorization for PIXUVRI. Pursuant to the Termination Agreement, we agreed to transfer and assign all of our rights and responsibilities for PIXUVRI globally to Servier pursuant to an asset purchase agreement.     

In August 2019, we entered into the asset purchase agreement, which was amended and restated in September 2019, or the Asset Purchase Agreement. The Asset Purchase Agreement required, among other things, Servier to pay us €2.0 million and assume responsibility for all of the obligations related to PIXUVRI, including the Company’s remaining royalty payments to Novartis International Pharmaceutical Ltd. and the University of Vermont. For the three and nine months ended September 30,

17



2019, we recognized $2.2 million of license and contract revenue related to the Asset Purchase Agreement, and all of our rights and responsibilities for PIXUVRI were transferred and assigned globally to Servier pursuant to the Asset Purchase Agreement.

6. Restructuring Activities

In December 2018, we announced a restructuring plan to improve efficiencies and reduce costs within the Company, which impacted a total of 21 positions. The restructuring activities were substantially completed as of March 31, 2019, and we have incurred total restructuring expenses of approximately $1.5 million to date, of which $0.8 million was incurred during the nine months ended September 30, 2019.

The following table summarizes the accrual balance and utilization for the nine months ended September 30, 2019 (in thousands):
 
Employee Separation Costs
Restructuring accruals - December 31, 2018
$
660

Restructuring expenses
794

Cash payments
(1,325
)
Restructuring accruals - September 30, 2019
$
129


7. Share-based Compensation Expense
The following table summarizes share-based compensation expense, which was allocated as follows (in thousands):
 
 
Three Months Ended
 September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
56

 
$
1,231

 
$
308

 
$
1,774

Selling, general and administrative
1,238

 
1,297

 
3,603

 
3,130

Total share-based compensation expense
$
1,294

 
$
2,528

 
$
3,911

 
$
4,904

 
We incurred share-based compensation expense (reversals) due to the following types of awards (in thousands):
 
 
Three Months Ended
 September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Restricted stock
$
1

 
$
2

 
$
(14
)
 
$
111

Options
1,293

 
2,526

 
3,925

 
4,793

Total share-based compensation expense
$
1,294

 
$
2,528

 
$
3,911

 
$
4,904


8. Other Comprehensive Loss
Total accumulated other comprehensive loss consisted of the following (in thousands):
 
Net Unrealized
 (Loss) Gain on
Available-For-
Sale Securities
 
Foreign
Currency
Translation
Adjustments
 
Unrealized
Foreign Exchange
Loss on
Intercompany
Balance
 
Accumulated
Other
Comprehensive
Loss
December 31, 2018
$
(14
)
 
$
(9,672
)
 
$
(957
)
 
$
(10,643
)
Current period other comprehensive income (loss)
20

 
1,570

 
(1,610
)
 
(20
)
September 30, 2019
$
6

 
$
(8,102
)
 
$
(2,567
)
 
$
(10,663
)

We anticipate the dissolution of CTILS, our wholly-owned subsidiary in the U.K., in the fourth quarter of 2019. Upon dissolution, we expect to recognize a loss on dissolution in Other non-operating (expense) income in the consolidated statement of operations, primarily attributable to a release of cumulative translation adjustment relating to an unrealized foreign exchange loss on intercompany balance in the table above. As of September 30, 2019, such balance was $2.6 million.

18




9. Contingencies

In April 2009, December 2009 and June 2010, the Italian Tax Authority, or the ITA, issued notices of assessment to CTI - Sede Secondaria, or CTI (Europe), based on the ITA’s audit of CTI (Europe)’s value added tax, or VAT, returns for the years 2003, 2005, 2006 and 2007, or, collectively, the VAT Assessments. The ITA audits concluded that CTI (Europe) did not collect and remit VAT on certain invoices issued to non-Italian clients for services performed by CTI (Europe). The assessments, including interest and penalties, for the years 2003, 2006 and 2007 are €0.6 million, €2.7 million and €0.9 million, respectively. We believe that the services invoiced were non-VAT taxable consultancy services and that the VAT returns are correct as originally filed. We have appealed all of the assessments and are defending ourselves against the assessments both on procedural grounds and on the merits of the cases, although we can make no assurances regarding the ultimate outcome of these cases. There have been no changes to the status of the legal proceedings surrounding each respective VAT year return at issue since the filing of our Annual Report on Form 10-K for the year ended December 31, 2018. See Part II, Item 8, "Notes to Consolidated Financial Statements, Note 18. Commitments and Contingencies" of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.

If the final decision of the Italian Supreme Court is unfavorable to us, or if, in the interim, the ITA were to make a demand for payment and we were to be unsuccessful in suspending collection efforts, we may be requested to pay the ITA an amount up to €4.2 million, or approximately $4.6 million converted using the currency exchange rate as of September 30, 2019, including interest and penalties for the period lapsed between the date in which the assessments were issued and the date of effective payment. We have not recorded this contingent liability in the financial statements as we do not believe the potential payment to the ITA is probable at this time.




19



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain, in addition to historical information, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. When used in this Quarterly Report on Form 10-Q, terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of those terms or other comparable terms are intended to identify such forward-looking statements.

These forward-looking statements include, but are not limited to:
our expectations regarding sufficiency of cash resources, cash expenditures, sources of cash flows and other projections, product manufacturing and sales, research and development expenses, selling, general and administrative expenses and additional losses;
our ability to obtain funding for our operations;
the timing of, and our ability to develop, commercialize, and obtain regulatory approval of pacritinib and other development programs we may pursue in the future;
the design of our clinical trials and anticipated enrollment, and the progress and potential of pacritinib and other development programs we may pursue in the future;
the timing of and results from clinical trials and pre-clinical development activities, including those related to pacritinib and any other product candidates we may develop in the future;
our ability to advance product candidates, including pacritinib and any other candidates we may develop in the future, into and successfully complete clinical trials;
our ability to achieve profitability, including our ability to effectively implement cost reduction strategies and realize anticipated cost savings from those efforts;
our expectations regarding federal, state and foreign regulatory requirements;
the rate and degree of market acceptance and clinical utility of pacritinib or any other product candidates we may develop in the future;
the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for any of our product candidates;
our ability to maintain and establish collaborations;
our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
our ability to negotiate, integrate, and implement collaborations, acquisitions and other strategic transactions;
our ability to engage and retain the employees required to advance our development activities and grow our business; and
developments relating to our competitors and our industry, including the success of competing therapies that are or become available.


20



These statements are based on assumptions about many important factors and information currently available to us to the extent that we have thus far had an opportunity to fully and carefully evaluate such information in light of all surrounding facts, circumstances, recommendations and analyses. Additionally, these statements are subject to known and unknown risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, particularly in “Factors Affecting Our Business, Financial Condition, Operating Results and Prospects,” that could cause actual results, levels of activity, performance or achievements to differ significantly from those projected. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

OVERVIEW

We are a biopharmaceutical company focused on the acquisition, development and commercialization of novel targeted therapies for blood-related cancers that offer a unique benefit to patients and their healthcare providers. Our goal is to build a profitable company by generating income from products we develop and commercialize, either alone or with partners. We concentrate our efforts on treatments that target blood-related cancers where there is an unmet medical need. In particular, we are focused on evaluating pacritinib, our sole product candidate currently in active development, for the treatment of adult patients with myelofibrosis.

Pacritinib is an investigational oral kinase inhibitor with specificity for JAK2, FLT3, IRAK1 and CSF1R. The JAK family of enzymes is a central component in signal transduction pathways, which are critical to normal blood cell growth and development, as well as inflammatory cytokine expression and immune responses. Mutations in these kinases have been shown to be directly related to the development of a variety of blood-related cancers, including myeloproliferative neoplasms, leukemia and lymphoma. In addition to myelofibrosis, the kinase profile of pacritinib suggests its potential therapeutic utility in conditions such as acute myeloid leukemia, or AML, myelodysplastic syndrome, or MDS, chronic myelomonocytic leukemia, or CMML, and chronic lymphocytic leukemia, or CLL, due to its inhibition of c-fms, IRAK1, JAK2 and FLT3. We believe pacritinib has the potential to be delivered as a single agent or in combination therapy regimens.

In May 2019, our independent data monitoring committee, or IDMC, for the dose-exploration clinical trial of pacritinib, which we refer to as the PAC203 Phase 2 trial, completed its planned fourth and final interim safety review and recommended that the trial continue without modification. We intend to report final results from the Phase 2 trial to the IDMC by providing them with the final study report. We also expect to report safety and efficacy data from the PAC203 Phase 2 trial at a scientific conference before the end of 2019. In July 2019, we met with the FDA for a Type B, End-of-Phase 2a meeting regarding the continued development of pacritinib and, in September 2019, we initiated patient enrollment in a Phase 3 clinical trial, which we refer to as the PACIFICA Phase 3 trial. The current PACIFICA Phase 3 trial protocol provides for the comparison of the safety and efficacy of 200mg of pacritinib administered twice daily to physician’s choice in adult patients with myelofibrosis and severe thrombocytopenia (platelet counts of less than 50,000 per microliter) who are treatment-naïve or intolerant to ruxolitinib. The current PACIFICA Phase 3 protocol provides for the evaluation of 180 adult patients. Based on a trial of the size provided for in the current PACIFICA Phase 3 trial protocol, we would anticipate topline data from the PACIFICA Phase 3 trial in mid-2021. We previously submitted to the FDA a proposed protocol amendment, which allowed a rapid transition to the PACIFICA Phase 3 trial. Additionally, in July 2019 we announced our decision to undertake an expanded access program, or EAP, for pacritinib for patients in the PAC203 Phase 2 trial. As a result, we extended the PAC203 Phase 2 trial to enable the patients to continue receiving pacritinib through the launch of the EAP. We expect the PACIFICA Phase 3 trial to be conducted at more than 100 sites worldwide with patients randomized in a ratio of 2:1 between pacritinib and physician’s choice. Under the current protocol for the PACIFICA Phase 3 trial, the primary endpoint is the percentage of patients who achieve at least 35% reduction in spleen volume at week 24 and secondary endpoints include the efficacy of pacritinib versus physician’s choice therapy as assessed by the proportion of patients achieving at least a 50% reduction in total symptom score between baseline and week 24, the overall survival of patients treated with pacritinib versus physician’s choice therapy and the percentage of patients treated with pacritinib who self-assess improvement compared to other patients treated with physician’s choice therapy.

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In early October 2019, we received correspondence from the FDA asking us to consider incorporating change in total symptom score, or TSS, at week 24 as a co-primary endpoint for the PACIFICA Phase 3 trial. Such a change to the trial protocol would require an increase in the number of patients evaluated over the course of the trial, as well as the costs and time required to complete the trial. We continue to analyze our regulatory options with regards to the assessment of TSS in the trial.

We face numerous risks in connection with clinical development of pacritinib generally and with respect to attempts to expedite the FDA regulatory approval process specifically. For more information, see Item 1A-Risk Factors-Risks Related to the Development, Clinical Testing and Regulatory Approval of Our Product Candidates. If investors view negatively FDA’s suggested change or other potential changes to the PACIFICA Phase 3 trial protocol that would increase the cost of the study and prolong the study, or if we are unable to expedite the regulatory approval process, we may be required to pursue strategic alternatives for the development of pacritinib and/or our company.

In April 2019, Les Laboratoires Servier and Institut de Recherches Internationales Servier, or together, Servier, announced that CHMP issued a positive opinion for PIXUVRI (pixantrone) to convert its conditional approval into a standard marketing authorization as a single agent for the treatment of adult patients with multiply relapsed or refractory aggressive non-Hodgkin B-cell lymphoma, and in June 2019, the European Commission adopted the decision to grant non-conditional marketing authorization for PIXUVRI. Pursuant to the Termination and Transfer Agreement between us and Servier, which we refer to as the Termination Agreement, in September 2019, we transferred and assigned all of our rights and responsibilities for PIXUVRI globally to Servier pursuant to an amended and restated asset purchase agreement. For more information on the Termination Agreement, see our Current Report on Form 8-K filed with the SEC on February 27, 2019.

We have incurred significant operating losses to date and expect that our operating losses will increase significantly as we advance pacritinib, through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. Our net losses were $10.0 million and $14.8 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $31.8 million and $30.2 million for the nine-month periods ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $2.3 billion and cash, cash equivalents and short-term investments of $46.7 million. We believe that our cash, cash equivalents and short-term investments will only be sufficient to fund our projected operations into the third quarter of 2020. This raises substantial doubt about our ability to continue as a going concern. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment.

Our ability to generate product revenue will depend on the successful development and eventual commercialization of pacritinib, and we must raise additional financing to fund the PACIFICA Phase 3 trial to completion. The amount of financing we require is dependent on many factors, such as the number of clinical trial sites, the number of patients in the trial, the pace of patient enrollment and other matters that may impact clinical development, including changes to the trial that we may initiate or that may be requested by the FDA or other regulators. Until such time as we can generate significant revenue from sales of pacritinib, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of pacritinib.

Factors Affecting Performance

Research and Development Activities

We will need to commit significant time and resources to develop our current and any future product candidates. Our product candidate, pacritinib, is currently in clinical development. Many drugs in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. We are unable to provide the nature, timing and estimated costs of the efforts necessary to complete the development of pacritinib because, among other reasons, we cannot predict with any certainty the pace of patient enrollment of our clinical trials, which is a function of many factors, including the availability and proximity of patients with the relevant condition and the availability of the compounds for use in the applicable trials. We rely on third parties to conduct clinical trials, which may result in delays or failure to complete trials if the third parties fail to perform or meet applicable standards. Even after a clinical trial is enrolled, preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory approval and advancement of this compound through the development process.

Regulatory agencies, including the FDA and EMA, regulate many aspects of a product candidate’s life cycle, including research and development and preclinical and clinical testing. We or regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks. In addition, based on our interactions with

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regulatory authorities we have, and may in the future, seek changes to the protocol of clinical trials if we believe such changes may enhance the probability of approval or are necessary to protect patient safety. Such changes, if any, would impact the size, timing and cost of clinical development. Even if a product candidate progresses successfully through initial human testing in clinical trials, it may fail in later stages of development, including as a result of a failure to adequately demonstrate safety or efficacy to the satisfaction of applicable regulatory authorities. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. For these reasons, among others, we cannot estimate the date on which clinical development of any product candidate will be completed, if ever, or when we will be able to begin commercializing pacritinib to generate material net cash inflows. In order to generate revenue from any of these compounds, any product candidate needs to be developed to a stage that will enable us to commercialize, sell or license related marketing rights to third parties.

We may also enter into collaboration agreements for the development and commercialization of our product candidates. We cannot control the amount and timing of resources our collaborators devote to product candidates, which may also result in delays in the development or marketing of products. Because of these risks and uncertainties, we cannot accurately predict when or whether we will successfully complete the development of any of our product candidates or the ultimate product development costs.

The risks and uncertainties associated with completing development on schedule and the consequences to operations, financial position and liquidity if the project is not timely completed are discussed in more detail in our risk factors, which can be found in Part II, Item 1A, “Risk Factors” of this report.

Financial Summary

Our revenues are generated from license and development services agreements. Our license and contract revenues primarily reflect milestone and royalty payments under such agreements. We had PIXUVRI sales prior to April 2017 when we entered into the Restated Agreement with Servier, which was terminated in February 2019. All of our rights and responsibilities for PIXUVRI were transferred and assigned globally to Servier in September 2019. Total revenues were $2.3 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $3.3 million and $12.2 million for the nine months ended September 30, 2019 and 2018, respectively. Loss from operations was $9.7 million and $14.8 million for the three months ended September 30, 2019 and 2018, respectively, and $31.2 million and $33.1 million for the nine months ended September 30, 2019 and 2018, respectively. Results of operations may vary substantially from year to year and from quarter to quarter and, as a result, you should not rely on them as being indicative of our future performance.

As of September 30, 2019, cash, cash equivalents and short-term investments were $46.7 million.

RESULTS OF OPERATIONS

Three and nine months ended September 30, 2019 and 2018

License and contract revenues

License and contract revenues are summarized as follows (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
 September 30,
 
 
 
2019
 
2018
 
2019
 
2018
Servier
Development services revenue
 
$

 
$
471

 
$
99

 
$
1,242

 
Royalty revenue
 
104

 
252

 
446

 
571

 
Other revenue
 
2,185

 

 
2,800

 
369

 
Total Servier revenue
 
2,289

 
723

 
3,345

 
2,182

 
 
 
 
 
 
 
 
 
 
Teva
Milestone revenue
 

 

 

 
10,000

 
Total Teva revenue
 

 

 

 
10,000

 
 
 
 
 
 
 
 
 
 
     Total
 
$
2,289

 
$
723

 
$
3,345

 
$
12,182




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Servier. License and contract revenue for the nine months ended September 30, 2019 included $0.1 million of development services revenue relating to the reimbursement of certain regulatory agency costs. There was no such revenue for the three months ended September 30, 2019. Other revenue for the three and nine months ended September 30, 2019 included $2.2 million of revenue recognized in connection with the Asset Purchase Agreement with Servier. In addition, other revenue for the nine months ended September 30, 2019 included $0.6 million of revenue related to transition period activities pursuant to the terms of the Termination Agreement with Servier. There was no such revenue relating to transition period activities for the three months ended September 30, 2019. See Part I, Item 1, Note 5. Termination of Servier Agreement of this Quarterly Report on Form 10-Q for further details.

License and contract revenue for the three and nine months ended September 30, 2018 included $0.4 million and $1.0 million, respectively, of development services revenue recognized from the upfront payments we received in connection with our license and collaboration agreement with Servier. In addition, we recorded development services revenue of $0.1 million and $0.2 million during the three and nine months ended September 30, 2018, respectively, for the reimbursement of pharmacovigilance expenses by Servier. Other revenue of $0.4 million for the nine months ended September 30, 2018 was related to the sale of PIXUVRI drug product to Servier, which had previously been written off. There was no such revenue for the three months ended September 30, 2018.

Teva. During the nine months ended September 30, 2018, we recognized $10.0 million in milestone revenue from Teva related to the achievement of a milestone for FDA approval of TRISENOX for first line treatment of acute promyelocytic leukemia. There were no such revenues for the comparable period in 2019 and during the three-month periods ended September 30, 2019 and 2018.

Operating costs and expenses

Research and development expenses. Our research and development expenses for compounds under development and preclinical development were as follows (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Compounds:
 
 
 
 
 
 
 
 
Pacritinib
 
$
5,912

 
$
3,083

 
$
13,330

 
$
13,782

PIXUVRI
 
288

 
2,384

 
1,227

 
4,930

Tosedostat
 
6

 
8

 
29

 
105

Operating expenses
 
1,392

 
4,250

 
4,536

 
9,696

Research and preclinical development
 

 
5

 
4

 
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Total research and development expenses
 
$
7,598

 
$
9,730

 
$
19,126

 
$
28,539

 
Costs for our compounds include external direct expenses such as principal investigator fees, charges from contract research organizations, or CROs, and contract manufacturing fees incurred for preclinical, clinical, manufacturing and regulatory activities associated with preparing the compounds for submissions of NDAs or similar regulatory filings to the FDA, the EMA or other regulatory agencies outside the U.S. and Europe, as well as upfront license fees for acquired technology. Subsequent to receiving a positive opinion for conditional approval of PIXUVRI in the E.U. from the EMA’s CHMP, costs associated with commercial batch production, quality control, stability testing, and certain other manufacturing costs of PIXUVRI were capitalized as inventory. Operating expenses include our personnel costs and an allocation of occupancy, depreciation and amortization expenses associated with developing these compounds. We are not able to capture the total cost of each compound because we do not allocate operating expenses to all of our compounds. External direct costs incurred by us through September 30, 2019 were $159.6 million for pacritinib (excluding costs for pacritinib prior to our acquisition of certain assets from S*BIO in May 2012 and $29.1 million of in-process research and development expenses associated with the acquisition of certain assets from S*BIO), $135.1 million for PIXUVRI (excluding costs prior to our 2004 merger with Novuspharma S.p.A, formerly a public pharmaceutical company located in Italy) and $14.0 million for tosedostat (excluding costs for tosedostat prior to our co-development and license agreement with Chroma Therapeutics Limited, or Chroma, in 2011 and $21.9 million of in-process research and development expenses associated with the acquisition of certain assets from Chroma).

Research and development expenses decreased to $7.6 million and $19.1 million for the three and nine months ended September 30, 2019, respectively, compared to $9.7 million and $28.5 million for the same periods in 2018. The decrease

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between the three-month periods ended September 30, 2019 and 2018 was primarily attributable to a $2.7 million decrease in personnel costs due to the reduction of our workforce in the fourth quarter of 2018, a $2.1 million decrease in PIX306 clinical trial close-out costs and a $0.1 million decrease in other operating expenses. These decreases were partially offset by a $2.8 million increase in pacritinib development costs primarily related to the commencement of the PACIFICA Phase 3 trial. The decrease between the nine-month periods ended September 30, 2019 and 2018 was primarily attributable to a $5.0 million decrease in personnel costs due to the reduction of our workforce in the fourth quarter of 2018, a $3.7 million decrease in PIX306 clinical trial close-out costs, a $0.2 million decrease in other operating expenses as well as a $0.5 million net decrease in pacritinib development costs, which was primarily related to the PAC203 Phase 2 dosing clinical trial, partially offset by an increase due to the commencement of the PACIFICA Phase 3 trial.

Selling, general and administrative expenses. Selling, general and administrative expenses were $4.4 million and $14.7 million for the three and nine months ended September 30, 2019, respectively, compared to $5.8 million and $16.8 million for the same periods in 2018. The decrease between the three-month periods ended September 30, 2019 and 2018 was primarily attributable to a $0.7 million decrease in professional and consulting services, a $0.5 million decrease in personnel costs due to the reduction of our workforce in the fourth quarter of 2018, and a $0.2 million decrease in travel and other expenses. The decrease between the nine-month periods ended September 30, 2019 and 2018 was primarily attributable to a $0.9 million decrease in professional and consulting services, a $0.8 million decrease in personnel costs due to the reduction of our workforce in the fourth quarter of 2018, a $0.5 million provision for excess, obsolete or unsalable inventory in 2018, and a $0.3 million decrease in travel and other expenses, offset by a $0.4 million increase in tax expenses.

Restructuring expenses. In December 2018, we announced a plan to reduce our workforce in order to improve efficiencies, reduce costs within the organization and preserve capital for pacritinib development. For the nine months ended September 30, 2019, we recorded $0.8 million of restructuring expenses related to employee separation costs. There were no such restructuring expenses for the same period in 2018 and for the three months ended September 30, 2019 and 2018. The restructuring activities were substantially completed as of March 31, 2019 and as such, we do not anticipate additional employee separation costs. See Part I, Item 1, Note 6. Restructuring Activities of this Quarterly Report on Form 10-Q for further details.

Non-operating income and expenses

Interest income. Interest income was $0.3 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, and $0.4 million and $0.8 million for the same periods in 2018. Interest income was primarily related to our short-term investments and cash equivalent securities.

Interest expense. Interest expense was $0.2 million and $0.8 million for the three and nine-month periods ended September 30, 2019, respectively, and $0.3 million and $0.9 million for the same periods in 2018. Interest expense was primarily related to our secured term loan. Interest expense decreased slightly between periods primarily due to a decrease in the average loan principal balance outstanding.

Amortization of debt discount and issuance costs. Amortization of debt discount and issuance costs of $0.1 million and $0.4 million for the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.4 million for the same periods in 2018 related to our secured term loan.

Foreign exchange loss. Foreign exchange loss for the three and nine months ended September 30, 2019 and 2018 was due to fluctuations in foreign currency exchange rates, primarily related to operations in our European subsidiary as well as assets and liabilities denominated in foreign currencies.

Other non-operating income. Other non-operating income for the nine months ended September 30, 2018 includes a $4.3 million gain on the dissolution of our foreign branch, primarily relating to the release of cumulative translation adjustment. There was no such income for the three and nine months ended September 30, 2019 or for the three months ended September 30, 2018.

Deemed dividends on preferred stock. Deemed dividends on preferred stock of $0.1 million for the nine months ended September 30, 2018 were related to the issuance of Series O Preferred Stock in February 2018. There were no deemed dividends on preferred stock for the three and nine months ended September 30, 2019 or for the three months ended September 30, 2018. See Part II, Item 8, "Notes to Consolidated Financial Statements, Note 8. Equity Transactions" of our Annual Report on Form 10-K for the year ended December 31, 2018 for information regarding our Series O Preferred Stock.


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LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We have funded our operations from proceeds from sales and issuance of equity securities, payments pursuant to license and collaboration agreements and the incurrence of debt. As of September 30, 2019, we had $46.7 million in cash, cash equivalents and short-term investments.

Common stock offering. In February 2018, we offered and sold 23.0 million shares of common stock at a $3.00 per share price. The net proceeds from the offering, after deducting underwriting commissions and discounts and other offering costs were approximately $64.2 million.

Loan agreement. In November 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which agreement was amended in May 2018, the proceeds of which were partially used to repay in full all outstanding indebtedness under a prior loan and security agreement. As of September 30, 2019, we had an outstanding principal balance under our secured term loan agreement of $11.6 million. We are required to pay interest plus principal payments in the approximate amount of $0.5 million per month until November 1, 2021, with the final principal plus interest payment totaling approximately $0.4 million as well as a back-end fee of $1.4 million. These borrowings are secured by a first priority security interest on substantially all of our personal property except our intellectual property and subject to certain other exceptions. In addition, the secured term loan agreement requires us to comply with restrictive covenants, including those that limit our operating flexibility and ability to borrow additional funds. Among other events, a failure to make a required loan payment, an uncured covenant breach or a material adverse change in our business, operations or condition (financial or otherwise) could lead to an event of default, and in such case, all amounts then outstanding may become due and payable immediately.
 
Historical Cash Flows

Net cash used in operating activities. Net cash used in operating activities decreased to $16.3 million during the nine months ended September 30, 2019 compared to $27.2 million for the same period in 2018. During the nine months ended September 30, 2019, we received €2.0 million pursuant to the Asset Purchase Agreement with Servier (or $2.2 million using the currency exchange rate as of the date of cash receipt). During this period, we also collected €3.0 million (or $3.3 million using the currency exchange rate as of the date of cash receipt) relating to the attainment of a regulatory milestone in November 2018 under the Restated Agreement with Servier and $10.0 million from Teva relating to the December 2018 achievement of a worldwide net sales milestone of TRISENOX. During the nine months ended September 30, 2018, we collected $10.0 million from Teva for the achievement of the milestone related to FDA approval of TRISENOX for first line treatment of acute promyelocytic leukemia. After taking these cash receipts into account, the remaining decrease in net cash used in operating activities was primarily due to a decrease in research and development activities as well as the timing of cash payments between the two periods.

Net cash provided by (used in) investing activities. Net cash provided by investing activities was $18.9 million during the nine months ended September 30, 2019, and net cash used in investing activities was $27.9 million during the same period in 2018. The change was primarily attributable to a decrease in purchases of short-term investments as well as an increase in proceeds from maturities of short-term investments during the nine-month period in 2019.

Net cash (used in) provided by financing activities. Net cash used in financing activities was $4.0 million during the nine months ended September 30, 2019, and net cash provided by financing activities was $64.1 million during the same period in 2018. The change was primarily due to the net proceeds from our February 2018 offering of common stock as well as repayment of debt in 2019.

In October 2016, we resumed primary responsibility for the development and commercialization of pacritinib as a result of the termination of the Pacritinib License Agreement. We currently have no commitments for additional financing to fund the development and commercial launch of pacritinib, and we will need to seek additional funding. The development and commercialization of a major product candidate like pacritinib without a collaborative partner will require a substantial amount of our time and financial resources, and as a result, we could experience a decrease in our liquidity and a new demand on our capital resources. For additional information relating to the Pacritinib License Agreement, see Part I, Item 1, “Business - License Agreements - Baxalta” of our Annual Report on Form 10-K for the year ended December 31, 2018.

Capital Resources


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We have prepared our condensed consolidated financial statements assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, we believe that our present financial resources will only be sufficient to fund our operations into the third quarter of 2020. This raises substantial doubt about our ability to continue as a going concern and we will need to raise substantial additional capital in the near term in order to fund our operations through and beyond the third quarter of 2020 and to continue as a going concern thereafter. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment. Further, we have incurred net losses since inception and expect to generate losses for the foreseeable future, primarily due to research and development costs for pacritinib. Because of our reacquisition of worldwide rights for pacritinib, we are no longer eligible to receive cost sharing or milestone payments for pacritinib’s development from Baxalta, and losses related to research and development for pacritinib have increased. We have historically funded our operations through equity financings, borrowings and funds obtained under product collaborations, any or all of which may not be available to us in the future. As of September 30, 2019, our available cash, cash equivalents and short-term investments totaled $46.7 million. We had an outstanding principal balance under our secured term loan agreement of $11.6 million as of September 30, 2019.

Financial resource forecasts are subject to change as a result of a variety of risks and uncertainties. Changes in manufacturing, developments in and expenses associated with our clinical trials and the other factors identified under “Capital Requirements” below may consume capital resources earlier than planned. Additionally, following our and Servier’s mutual termination of our collaborative agreement, other than amounts we are entitled to or may become entitled to pursuant to our termination agreement, we do not anticipate additional revenues or payments from Servier relating to PIXUVRI. Although we received a $10.0 million milestone payment from Teva Pharmaceutical Industries Ltd. in February 2019 relating to the achievement of a worldwide net sales milestone of TRISENOX, achievement of the remaining milestones is uncertain at this time. Due to these and other factors, the foregoing forecast for the period for which we will have sufficient resources to fund our operations may be inaccurate.

Capital Requirements

We will need to acquire additional funds in order to develop our business and continue the development of pacritinib. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, we have a limited number of authorized shares of common stock available for issuance and additional funding may not be available on favorable terms or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs and/or reduce our selling, general and administrative expenses, be unable to attract and retain highly qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations and at affordable rates with competitive terms, refrain from making our contractually required payments when due (including debt payments) and/or be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. Our future capital requirements will depend on many factors, including:

developments in and expenses associated with our research and development activities;
changes in manufacturing;
our clinical development plans and any changes that we may initiate or that may be requested by the FDA or other regulators;
regulatory approval developments;
our ability to generate sales of any approved product;
our ability to execute appropriate collaborations for development and commercialization activities;
our ability to reach milestones triggering payments under certain of our contractual arrangements;
acquisitions of compounds or other assets;
litigation and other disputes;

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competitive market developments; and
other unplanned business developments.

Off-Balance Sheet Arrangements

We do not presently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.

LICENSE AGREEMENTS AND MILESTONE ACTIVITIES

For information regarding our license agreements and milestone activities, please see Part I, Item 1, “Business - License Agreements” of our Annual Report on Form 10-K for the year ended December 31, 2018.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure in the preparation of our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that significantly impact our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates. For a discussion of our critical accounting estimates, please see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to our critical accounting policies and estimates discussed therein other than the accounting policy for leases as discussed in Part I, Item 1, Note 1. Description of Business and Summary of Significant Accounting Policies of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission, or SEC, rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting that occurred during the third fiscal quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See Part I, Item 1, "Notes to Condensed Consolidated Financial Statements, Note 9. Contingencies of this report and Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2018 for information regarding material pending legal proceedings.

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. The occurrence of any of the risks described below and elsewhere in this document, including the risk that our actual results may differ materially from those anticipated in these forward-looking statements, could materially adversely affect our business, financial condition, liquidity, operating results or prospects and the trading price of our securities. Additional risks and uncertainties that we do not presently know or that we currently deem immaterial may also harm our business, financial condition, operating results and prospects and the trading price of our securities.

Risks Related to Our Business

We expect to continue to incur net losses, and we may never achieve profitability.

We were incorporated in 1991 and have incurred a net operating loss every year since our formation. As of September 30, 2019, we had an accumulated deficit of $2.3 billion, and we expect to continue to incur additional net losses. As part of our business plan, we will need to continue to conduct research, development, testing and regulatory compliance activities with respect to our compounds and ensure the procurement of manufacturing and drug supply services, the costs of which, together with projected general and administrative expenses, is expected to result in operating losses for the foreseeable future. There can be no assurances that we will ever achieve profitability.

Our prospects are dependent on the successful development, regulatory approval and commercialization of pacritinib.

Obtaining regulatory approval requires substantial time, effort and financial resources, and without additional financing, we lack sufficient resources to pursue the development of pacritinib. We currently have no commitments or arrangements for any additional financing to fund the development and commercial launch of pacritinib, and we will need to seek additional funding, which may not be available or may not be available on favorable terms. The amount of financing we require is dependent on many factors, such as the number of clinical trial sites, the number of patients in the trial, the pace of patient enrollment and other matters that may impact clinical development, including changes to the trial that we may initiate or that may be requested by the FDA or other regulators, and there can be no assurance as to the amount of funding necessary to fund the development of pacritinib to completion. We could also seek another collaborative partnership for the development and commercialization of pacritinib, which may not be available on reasonable terms or at all. If we partner pacritinib, we may have to relinquish valuable economic rights and would potentially forgo additional economic benefits that could be realized if we continued the development and commercialization activities alone. Even if pacritinib receives approval from the FDA, EMA or other regulatory authorities, we would need to incur significant expenses to support the commercialization and launch of pacritinib, which investment may never be realized if sales are insufficient. As our sole product candidate in active development, our prospects are dependent upon the successful development, approval and commercialization of pacritinib. If we fail to obtain regulatory approval and successfully commercialize pacritinib, our business would be materially and adversely impacted as we have no other product candidates in active clinical development.

We face direct and intense competition from our competitors in the biotechnology and pharmaceutical industries, and we may not compete successfully against them.

Competition in the oncology market is intense and is accentuated by the rapid pace of technological and product development. We anticipate that we will face increased competition in the future as new companies enter the market. Our competitors in the U.S. and elsewhere are numerous and include, among others, major multinational pharmaceutical companies, specialized biotechnology companies and universities and other research institutions. Specifically, if we are successful in bringing pacritinib to market, pacritinib will face competition from the currently approved JAK1/JAK2 inhibitors, Jakafi® / Jakavi® and Inrebic® (fedratinib). Celgene announced FDA approval of Inrebic® for the treatment of adult patients with intermediate-2 or high-risk primary or secondary (post-polycythemia vera or post-essential thrombocythemia) myelofibrosis. Pacritinib may also face competition from momelotinib, which Sierra Oncology acquired

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from Gilead. In June 2019, Sierra Oncology announced that momelotinib was granted fast track designation by the FDA and has announced the design of a Phase 3 clinical trial planned for launch in the fourth quarter of 2019.

In addition to the specific competitive factors discussed above, new anti-cancer drugs that may be under development or developed and marketed in the future could compete with our various compounds.

Many of our competitors, particularly multinational pharmaceutical companies, either alone or together with their collaborators, have substantially greater financial and technical resources and substantially larger development and marketing teams than us, as well as significantly greater experience than we do in developing, commercializing, manufacturing, marketing and selling products. As a result, products of our competitors might come to market sooner or might prove to be more effective, less expensive, have fewer side effects or be easier to administer than ours. In any such case, sales of any potential future product would likely suffer and we might never recoup the significant investments we have made and will continue to make to develop and market these compounds.

Even if pacritinib or other compounds we may develop are successful in clinical trials and receive regulatory approvals, we or our collaboration partners may not be able to successfully commercialize them.

The development and ongoing clinical trials for pacritinib and other compounds we may develop may not be successful and, even if they are, the resulting products may never be successfully developed into commercial products. Even if we are successful in our clinical trials and in obtaining other regulatory approvals, our products may not reach or remain in the market for a number of reasons including:

they may be found ineffective or cause harmful side effects;

they may be difficult to manufacture on a scale necessary for commercialization;

they may experience excessive product loss due to contamination, equipment failure, inadequate transportation or storage, improper installation or operation of equipment, vendor or operator error, natural disasters or other catastrophic events, inconsistency in yields or variability in product characteristics;

they may be uneconomical to produce;

political and legislative changes may make the commercialization of pacritinib, or any other product candidates we may develop in the future, more difficult;

we may fail to obtain reimbursement approvals or pricing that is cost effective for patients as compared to other available forms of treatment or that covers the cost of production and other expenses;

they may not compete effectively with existing or future alternatives;

we may be unable to develop commercial operations and to sell marketing rights;

they may fail to achieve market acceptance; or

we may be precluded from commercialization of a product due to proprietary rights of third parties.

Uncertainty and speculation continue regarding the possible repeal of all or a portion of the Patient Protection and Affordable Care Act through legislative action, as well as possible changes to the regulations implemented under the Patient Protection and Affordable Care Act by the Department of Health and Human Services. The uncertainty this causes for the healthcare industry could also adversely affect the commercialization of our products. If we fail to commercialize products or if our future products do not achieve significant market acceptance, we will not likely generate significant revenues or become profitable.

We will need to raise additional funds to operate our business, but additional funds may not be available on acceptable terms, or at all. Any inability to raise required capital when needed could harm our liquidity, financial condition, business, operating results and prospects.

We have substantial operating expenses associated with the development of pacritinib, and we have significant contractual payment obligations. Our available cash, cash equivalents and short-term investments were $46.7 million as of

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September 30, 2019. We received a $10.0 million milestone payment from Teva Pharmaceutical Industries Ltd. in February 2019 relating to the achievement of a worldwide net sales milestone of TRISENOX in December 2018. However, we believe that our present financial resources will only be sufficient to fund our operations into the third quarter of 2020. This raises substantial doubt about our ability to continue as a going concern and we will need to raise substantial additional capital in the near term in order to fund our operations through and beyond the third quarter of 2020 and to continue as a going concern thereafter. See Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock, which could negatively impact our ability to raise sufficient funds to continue development of pacritinib and continue as a going concern. In addition, cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties. Developments in and expenses associated with our clinical trials and other research and development activities, including regulatory approval developments, our ability to consummate appropriate collaborations for development and commercialization activities, our ability to reach milestones triggering payments under applicable contractual arrangements, receive the associated payments, litigation and other disputes, competitive market developments and other unplanned expenses or business developments may consume capital resources earlier than planned. Due to these and other factors, any forecast for the period for which we will have sufficient resources to fund our operations, as well as any other operational or business projection we have disclosed, or may, from time to time, disclose, may fail.

We will need to acquire additional funds in order to develop our business and continue the development of pacritinib. We may seek to raise such capital through public or private equity financings, partnerships, collaborations, joint ventures, disposition of assets, debt financings or restructurings, bank borrowings or other sources of financing. However, our ability to raise capital is subject to a number of risks, uncertainties, constraints and consequences, including, but not limited to, the following:

our ability to raise capital through the issuance of additional shares of our common stock or convertible securities is restricted by the limited number of our authorized shares available for issuance, the potential difficulty of obtaining stockholder approval to increase authorized shares and the restrictive covenants under our secured term loan agreement;

issuance of equity-based securities will dilute the proportionate ownership of existing stockholders;

our ability to obtain further funds from any potential loan arrangements is limited by our existing loan and security agreement;

certain financing arrangements may require us to relinquish rights to various assets and/or impose more restrictive terms than any of our existing or past arrangements;

we may be required to meet additional regulatory requirements, and we may be subject to certain contractual limitations, which may increase our costs and harm our ability to obtain funding;

for so long as our non-affiliate public float does not exceed $75 million, our ability to file or use shelf registration statements on Form S-3 to raise capital will be limited; and

if we are not listed on the Nasdaq or any stock exchange, whether due to a failure to regain compliance with the minimum bid price requirement (as discussed below) or otherwise, our ability to raise capital will be adversely impacted.

For these and other reasons, additional funding may not be available on favorable terms or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. If we fail to obtain additional capital when needed, we may be required to delay, scale back or eliminate some or all of our research and development programs, reduce our selling, general and administrative expenses, be unable to attract and retain highly qualified personnel, refrain from making our contractually required payments when due (including debt payments) and/or be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection. Any of these consequences could harm our business, financial condition, operating results and prospects.

We may never be able to generate significant product revenues.

We anticipate that, for at least the next several years, our ability to generate significant revenues and become profitable will be dependent on our ability to obtain regulatory approval for and successfully commercialize pacritinib. If we

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are unable to successfully commercialize our development stage or approved products as planned, our business, financial condition, operating results and prospects could be harmed.

We are dependent on third-party service providers for a number of critical operational activities including, in particular, for the manufacture, testing and distribution of our compounds and associated supply chain operations, as well as for clinical trial activities. Any failure or delay in these undertakings by third parties could harm our business.

Our business is dependent on the performance by third parties of their responsibilities under contractual relationships. In particular, we rely heavily on third parties for the manufacture and testing of our compounds. We do not have internal analytical laboratory or manufacturing facilities to allow the testing or production of our compounds in compliance with GLP and cGMP. As a result, we rely on third parties to supply us in a timely manner with manufactured products or product candidates. We may not be able to adequately manage and oversee the manufacturers we choose, they may not perform as agreed or they may terminate their agreements with us. In particular, we depend on third-party manufacturers to conduct their operations in compliance with GLP and cGMP or similar standards imposed by the U.S. and/or applicable foreign regulatory authorities, including the FDA and EMA. Any of these regulatory authorities may take action against a contract manufacturer who violates GLP and cGMP. Failure of our manufacturers to comply with FDA, EMA or other applicable regulations may cause us to curtail or stop the manufacture of such products until we obtain regulatory compliance, and could subject us to penalties.

We may not be able to obtain sufficient quantities of our compounds if we are unable to secure manufacturers when needed, or if our designated manufacturers do not have the capacity or otherwise fail to manufacture compounds according to our schedule and specifications or fail to comply with cGMP regulations. In particular, in connection with the transition of the manufacturing of drug supply to successor vendors, we could face logistical, scaling or other challenges that may adversely affect supply. Furthermore, in order to ultimately obtain and maintain applicable regulatory approvals, any manufacturers we utilize are required to consistently produce the respective compounds in commercial quantities and of specified quality or execute fill-finish services on a repeated basis and document their ability to do so, which is referred to as process validation. In order to obtain and maintain regulatory approval of a compound, the applicable regulatory authority must consider the result of the applicable process validation to be satisfactory and must otherwise approve of the manufacturing process. Even if our compound manufacturing processes obtain regulatory approval and sufficient supply is available to complete clinical trials necessary for regulatory approval, there are no guarantees we will be able to supply the quantities necessary to effect a commercial launch of the applicable drug, or once launched, to satisfy ongoing demand. Any shortage could also impair our ability to deliver contractually required supply quantities to applicable collaborators, as well as to complete any additional planned clinical trials.

We also rely on third-party service providers for certain warehousing, transportation, sales, order processing, distribution and cash collection services. With regard to the distribution of our compounds, we depend on third-party distributors to act in accordance with GDP, and the distribution process and facilities are subject to continuing regulation by applicable regulatory authorities with respect to the distribution and storage of products.

In addition, we depend on medical institutions and CROs (together with their respective agents) to conduct clinical trials and associated activities in compliance with GCP and in accordance with our timelines, expectations and requirements. To the extent any such third parties are delayed in achieving or fail to meet our clinical trial enrollment expectations, fail to conduct our trials in accordance with GCP or study protocol or otherwise take actions outside of our control or without our consent, our business may be harmed. Furthermore, we conduct clinical trials in foreign countries, subjecting us to additional risks and challenges, including, in particular, as a result of the engagement of foreign medical institutions and foreign CROs, who may be less experienced with regard to regulatory matters applicable to us and may have different standards of medical care.

With regard to certain of the foregoing clinical trial operations and stages in the manufacturing and distribution chain of our compounds, we rely on single vendors. In addition, in the event pacritinib is approved, we will initially have only one commercial supplier for pacritinib. We may in the future seek to qualify an additional manufacturer of pacritinib, but the process for qualifying a manufacturer, and seeking prior regulatory approval for a new manufacturer, can be lengthy and expensive and may not occur on a timely basis or at all. The use of single vendors for core operational activities, such as clinical trial operations, manufacturing and distribution, and the resulting lack of diversification, exposes us to the risk of a material interruption in service related to these single, outside vendors. As a result, our exposure to this concentration risk could harm our business.

Although we monitor the compliance of our third-party service providers performing the aforementioned services, we cannot be certain that such service providers will consistently comply with applicable regulatory requirements or that

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they will otherwise timely satisfy their obligations to us. Any such failure and/or any failure by us to monitor their services and to plan for and manage our short and long term requirements underlying such services could result in shortage of the compound, delays in or cessation of clinical trials, failure to obtain or revocation of product approvals or authorizations, product recalls, withdrawal or seizure of products, suspension of an applicable wholesale distribution authorization and/or distribution of products, operating restrictions, injunctions, suspension of licenses, other administrative or judicial sanctions (including civil penalties and/or criminal prosecution) and/or unanticipated related expenditures to resolve shortcomings. Such consequences could have a significant impact on our business, financial condition, operating results or prospects.

We are party to a loan and security agreement that contains operating and financial covenants that may restrict our business and financing activities and we may be required to repay the outstanding indebtedness in an event of default, which could have a materially adverse effect on our business.

In November 2017, we entered into a loan and security agreement with Silicon Valley Bank, which was amended in May 2018, the proceeds of which were partially used to repay in full all outstanding indebtedness under a prior loan and security agreement.

Borrowings under this loan and security agreement are secured by substantially all of our assets except intellectual property and subject to certain other exceptions. The loan and security agreement restricts our ability, among other things, to:

sell, transfer or otherwise dispose of any of our business assets or property, subject to limited exceptions;

make material changes to our business or management;

enter into transactions resulting in significant changes to the voting control of our stock;

make certain changes to our organizational structure;

consolidate or merge with other entities or acquire other entities;

incur additional indebtedness or create encumbrances on our assets;

pay dividends, other than dividends paid solely in our common shares, or make distributions on and, in certain cases, repurchase our capital stock;

enter into certain transactions with our affiliates;

repay subordinated indebtedness; or

make certain investments.

In addition, we are required under our loan agreement and security agreement to comply with various affirmative covenants. The covenants and restrictions and obligations in our loan and security agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants, including a material adverse change in
our business, operations or condition (financial or otherwise) could result in a default under the loan and security agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable.

If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either when they mature, or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our business operations and financial condition.

If we are unable to recruit, retain, integrate and motivate senior management, other key personnel and directors, or if such persons are unable to perform effectively, our business could suffer.

Our future success depends, in part, on our ability to continue to attract and retain senior management, other key personnel and directors to enable the execution of our business plan and to identify and pursue new opportunities. Additionally, our productivity and the quality of our operations are dependent on our ability to integrate and train our new personnel quickly and effectively. In February 2017, we announced the appointment of Adam Craig, M.D., Ph.D., as

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President and Chief Executive Officer effective March 2017, and also in September 2017, we announced the appointment of Bruce J. Seeley as Executive Vice President, Chief Operating Officer and David H. Kirske as Chief Financial Officer. In December 2018, we announced a restructuring plan to improve efficiencies and reduce costs within the organization, which resulted in workforce reductions impacting approximately half of the total number of our employees immediately prior to the restructuring. These leadership transitions, management changes and the recent reduction in force can be difficult to manage and may create uncertainty or disruption to our business, increase the likelihood of turnover in our other officers and employees and negatively impact our ability to recruit.

Directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well as governmental, creditor and other claims that may be made against them. Due to these and other reasons, such persons are also becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending such claims. We currently carry directors and officers liability insurance. However, directors and officers liability insurance is expensive and can be difficult to obtain, particularly for companies like ours that have had a history of litigation. In addition, the cost of obtaining directors and officers liability insurance recently has been increasing while applicable coverage has been decreasing and self-insured retention levels have been increasing, which requires us to pay higher premiums and reserve for higher self-insurance retention levels. If we are unable to continue to provide directors and officers sufficient liability insurance at affordable rates or at all, or if directors and officers perceive our ability to do so in the future to be limited, it may become increasingly more difficult to attract and retain management and qualified directors to serve on our Board of Directors.

The loss of the services of senior management, other key personnel or directors and/or the inability to timely attract or integrate such persons could significantly delay or prevent the achievement of our development and strategic objectives and may adversely affect our business, financial condition and operating results.

If we are unable to in-license or acquire additional product candidates, our future product portfolio and potential profitability could be harmed.

One component of our business strategy is the in-licensing and acquisition of drug compounds developed by other pharmaceutical and biotechnology companies or academic research laboratories, such as pacritinib. Competition for new promising compounds and commercial products can be intense. If we are not able to identify future in-licensing or acquisition opportunities and enter into arrangements on acceptable terms, our future product portfolio and potential profitability could be harmed.

We may owe additional amounts for VAT related to our operations in Europe.

Our European operations are subject to the VAT which is usually applied to all goods and services purchased and sold throughout Europe. We historically carried out research and development activities in Italy and incurred value added tax, or VAT, from Italian suppliers on the acquisition of goods and services in Italy. This VAT should be considered as an input VAT credit. We treated the majority of our sales made in Italy without output VAT (on the basis that the supplies should be considered outside the scope of Italian VAT). This resulted in the value of input VAT exceeding the value of output VAT, and accordingly we submitted a refund claim for the VAT. The Italian Tax Authority, or the ITA, has challenged the treatment of the sales transactions and claimed that the sales transactions made by us should have been subject to output VAT. Our Italian VAT receivable was $4.3 million and $4.5 million as of September 30, 2019 and December 31, 2018, respectively.

On April 14, 2009, December 21, 2009 and June 25, 2010, the ITA issued notices of assessment to CTI (Europe) based on the ITA’s audit of CTI (Europe)’s VAT returns for the years 2003, 2005, 2006 and 2007. The ITA audits concluded that CTI (Europe) did not collect and remit VAT on certain invoices issued to non-Italian clients for services performed by CTI (Europe). The assessments, including interest and penalties, for the years 2003, 2006 and 2007 are €0.6 million, €2.7 million and €0.9 million, respectively. While we are defending ourselves against the assessments both on procedural grounds and on the merits of the case, there can be no assurances that we will be successful in such defense. The 2005 VAT assessment was decided in favor of the Company by the Italian Supreme Court, with no further potential liabilities for the Company. Further information pertaining to these cases can be found in Part I, Item 1, "Notes to Condensed Consolidated Financial Statements, Note 9. Contingencies" and is incorporated by reference herein. If the final decision of the Italian Supreme Court is unfavorable to us, or if, in the interim, the ITA were to make a demand for payment and we were to be unsuccessful in suspending collection efforts, we may be requested to pay to the ITA an amount up to €4.2 million, or approximately $4.6 million converted using the currency exchange rate as of September 30, 2019, including interest and penalties for the period lapsed between the date in which the assessments were issued and the date of effective payment.


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We are currently subject to certain regulatory and legal proceedings, and may in the future be subject to additional proceedings and/or allegations of wrong-doing, which could harm our financial condition and operating results.

We are currently, and may in the future be, subject to regulatory matters and legal claims, including possible securities, derivative, consumer protection and other types of proceedings pursued by individuals, entities or regulatory bodies. For more information, see Part I, Item 1, “Notes to Condensed Consolidated Financial Statements, Note 9. Contingencies” Additionally, we were previously required to supply documents in response to a subpoena from the SEC in connection with an investigation into potential federal securities law violations; however, in August 2018, the SEC staff sent a letter stating that it had concluded its investigation of us, and, based on information it had as of that date, it did not intend to recommend an enforcement action against us. Litigation and regulatory proceedings are subject to inherent uncertainties, and we have had and may in the future have unfavorable rulings and settlements. Adverse outcomes may result in significant monetary damages and penalties or injunctive relief against us. It is possible that our financial condition and operating results could be harmed in any period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable. If an unfavorable ruling were to occur in any of the legal proceedings we are or may be subject to, our business, financial condition, operating results and prospects could be harmed. The ultimate outcome of litigation and other claims is subject to inherent uncertainties, and our view of these matters may change in the future.

We cannot predict with certainty the eventual outcome of any litigation or regulatory proceedings we are or may be party to in the future. In addition, negative publicity resulting from any allegations of wrong-doing could harm our business, regardless of whether the allegations are valid or whether there is a finding of liability. Furthermore, we may have to incur substantial time and expense in connection with such lawsuits and management’s attention and resources could be diverted from operating our business as we respond to the litigation. Our insurance policies are subject to high deductibles or self-insured retention amounts and there is no guarantee that the insurance will cover any specific claim that we currently face or may face in the future, or that it will be adequate to cover all potential liabilities and damages. In the event of negative publicity resulting from allegations of wrong-doing and/or an adverse outcome under any currently pending or future lawsuit, our business could be materially harmed.

A variety of risks associated with international operations could materially adversely affect our business.

If we engage in significant cross-border activities, we will be subject to risks related to international operations, including:

different regulatory requirements for initiating clinical trials and maintaining approval of drugs in foreign countries;

reduced protection for intellectual property rights in certain countries;

unexpected changes in tariffs, trade barriers and regulatory requirements;

economic weakness, including inflation, political instability or open conflict in particular foreign economies and markets;

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations of doing business in another country;

workforce uncertainty in countries where labor unrest is more common than in North America;

likelihood of potential or actual violations of domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international export control and sanctions regulations, which likelihood may increase with an increase of operations in foreign jurisdictions;

tighter restrictions on privacy, data protection, and the collection and use of data, including genetic material, may apply in jurisdictions outside of North America; and

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

If any of these issues were to occur, our business could be materially harmed.


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Our net operating losses may not be available to reduce future income tax liability.

We have substantial tax loss carryforwards for U.S. federal income tax purposes, but our ability to use such carryforwards to offset future income or tax liability is limited under section 382 of the Internal Revenue Code of 1986, as amended, as a result of prior changes in the stock ownership of our company. Moreover, future changes in the ownership of our stock, including those resulting from issuance of shares of our common stock upon exercise of outstanding warrants, may further limit our ability to use our net operating losses.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the United States signed into law, on December 22, 2017, tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property. We have completed our determination of the accounting implications of the 2017 Tax Act. The rate adjustment to deferred tax assets, a discrete item for the quarter, is fully offset by a decrease in the valuation allowance: there is therefore no rate impact to us. In addition, there is no impact to current or deferred taxes related to the one-time deemed repatriation, as our foreign subsidiaries do not have cumulative positive earnings and profits. We are continuing to evaluate the impact of the 2017 Tax Act as further guidance is released. The foregoing items could have a material adverse effect on our business, cash flow, financial condition or results of operations.

We could be subject to additional income tax liabilities.

We are subject to income taxes in the United States and certain foreign jurisdictions. We use significant judgment in evaluating our worldwide income-tax provision. During the ordinary course of business, we conduct many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.

Our international operations subject us to potential adverse tax consequences.

We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.

We are subject to risk regarding currency exchange rate fluctuations associated with the translation of monetary amounts in foreign currencies into U.S. dollars.

We are exposed to risks associated with the translation of euro-denominated financial results and accounts into U.S. dollars for financial reporting purposes. The carrying value of the assets and liabilities, as well as the reported amounts of revenues and expenses, will be affected by fluctuations in the value of the U.S. dollar as compared to the euro. Certain of our transactions denote monetary amounts in foreign currencies, and consequently, the ultimate financial impact to us from

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a U.S. dollar perspective is subject to significant uncertainty. Furthermore, the referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of an exit from the European Union has resulted in increased volatility in the global financial markets and caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against the euro. Changes in the value of the U.S. dollar as compared to foreign currencies (in particular, the euro) might have an adverse effect on our reported operating results and financial condition.

Because there is a risk of product liability associated with developing and commercializing pharmaceuticals, we face potential difficulties in obtaining insurance, and if product liability lawsuits were to be successfully brought against us, our business may be harmed.

Our business exposes us to potential product liability risks inherent in the testing, manufacturing, marketing and sale of human pharmaceutical products. If our insurance covering a compound is not maintained on acceptable terms or at all, we might not have adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop. A successful product liability claim could also exceed our insurance coverage and could harm our financial condition and operating results.

The illegal distribution and sale by third parties of counterfeit versions of a product or stolen product could have a negative impact on our reputation and business.

Third parties might illegally distribute and sell counterfeit or unfit versions of a product that do not meet our rigorous manufacturing and testing standards. A patient who receives a counterfeit or unfit product may be at risk for a number of dangerous health consequences. Our reputation and business could suffer harm as a result of counterfeit or unfit product sold under our brand name. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels, could adversely impact patient safety, our reputation and our business.

We may be subject to claims relating to improper handling, storage or disposal of hazardous materials.

Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations, both internationally and domestically, governing the use, manufacture, storage, handlings, treatment, transportation and disposal of such materials and certain waste products and employee safety and health matters. Although we believe that our safety procedures for handling and disposing of such materials comply with applicable law and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result and any such liability not covered by insurance could exceed our resources. Compliance with environmental, safety and health laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts.

We depend on sophisticated information technology systems to operate our business and a cyber-attack or other breach of these systems could have a material adverse effect on our business.

We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. The size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy or other significant disruption. Any such successful attacks could result in the theft of intellectual property or other misappropriation of assets, result in the loss or disclosure of personal data, or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks are becoming more sophisticated and frequent. We have invested in our systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on an ongoing basis for any current or potential threats. We anticipate needing to make further investments in protecting against these matters going forward. There can be no assurance that these measures and efforts will prevent future interruptions, breakdowns, security breach or other incidents. If we fail to maintain or protect our information technology systems and data integrity effectively or fail to anticipate, plan for or manage significant disruptions to these systems, we could find it necessary or advisable to need to notify individuals, government agencies, or others, have difficulty preventing, detecting and controlling fraud, have disputes with customers, physicians and other health care professionals, face private litigation, be subject to negative publicity and harm to our reputation, face regulatory investigations and have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues, be exposed to increased costs including remediation costs, disruption of operations, or increased cybersecurity protection costs, or suffer other adverse consequences, any of which could have a material adverse effect on our bu